Sells 75 shares of stock purchased on septem 2012 for

February 24,
2013:
Sells 75 shares of stock purchased on Septem
2012, for $14 per share.
March 7, 2013:
Purchases 50 shares of Winston Corp. stock f
share.
November 17,
2013:
Sells the remaining 75 shares for $12 a share.
The results of the above transactions are as
follows:
1. On the February 24, 2013 sale, the realized
loss is $450, but $300 of it is disallowed and
$150 is short-term loss (stock held less than 12
months). Only two-thirds of the realized loss is
disallowed because only two-thirds (50 out of
75) is considered to be a wash sale (i.e., because
50 shares are later purchased on March 7).
2. The basis of the 50 shares acquired on March
7, 2013, is $1,050 ($750 + $300).
3. The loss realized on November 17, 2013, is
$650, computed as follows:
Selling price $900
Basis: $20 × 25 shares $500
March 7 stock 1,050 1,550
Loss $(650)
It is considered long-term loss since the holding
period of the stock acquired on March 7, 2013,
includes the holding period from September 12,
2012, to February 24, 2013.
¶10,215 PERSONAL-USE PROPERTY CONVERSION
When property purchased for personal use is converted to business or income-producing use, the
basis for determining loss is the lesser of (1) the fair market value of the property at the time of
the conversion, or (2) the adjusted basis for loss at the time of the conversion. Reg. §1.165-9(b)
(2). This rule is to prevent the taxpayer from converting a nondeductible personal loss into a
deductible business loss. The basis for gain is the adjusted basis on the date of conversion. The
basis for determining depreciation is the basis for determining loss. Reg. §1.167(g)-1. No gain or
loss results on sale of converted personal-use property if the amount realized is between the basis
for gain and the basis for loss.

EXAMPLE 10.35 Terry Trudman has a residence that had an adjusted basis of $150,000 but a
fair market value of $100,000 at the time of conversion to rental property.
The basis for determining loss is $100,000. The basis for determining gain is
$150,000, the adjusted basis at the time of the conversion. If $10,000
depreciation (computed on the basis for determining loss) is taken between
the time of conversion and sale, the results under the following assumptions
are:
1. In a sale for $85,000, the loss is $5,000 or $85,000 – $90,000 ($100,000 –
$10,000).
2. In a sale for $175,000, the gain is $35,000 or $175,000 – $140,000
($150,000 – $10,000).
3. In a sale for $130,000, there is neither gain nor loss because by using the
basis for gain one gets a loss of $10,000 ($130,000 – $140,000) and by using
the basis for loss, one gets a gain of $40,000 ($130,000 – $90,000).
KEYSTONE
PROBLEM
Determine what the initial basis of an asset would be in the following
situations:
1. Purchase of asset
2. Bargain purchase
3. Lump-sum purchase of several assets
4. Property acquired by gift
5. Property acquired from a decedent
6. Property converted from personal use to business or income-
producing use
7. Property acquired in a wash sale
8. Nontaxable stock dividends and stock rights
¶10,225 RELATED PARTIES
No loss deduction is allowed on sales or exchanges of property, directly or indirectly, between
certain related parties. Without this provision, related taxpayers might enter transactions solely